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Why Community Interest Companies should consider the Single Transferable Vote

September 20, 2013

Community Interest Companies (CICs) are a relatively new form of company introduced under the Companies Act 2006. They allow profits to be made but also require directors to pursue social objectives as well. The CIC regulator describes them thus:

“What is a community interest company (CIC)?
A CIC is a type of company, designed in particular for social enterprises that want to use their profits and assets for the
public good.  CICs are easy to set up, with all the flexibility and certainty of the company form, but with some special features to ensure they are working for the benefit of the community.

What is a Social Enterprise?
“A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.

Social enterprises tackle a wide range of social and environmental issues and operate in all parts of the economy. By using
business solutions to achieve public good, the Government believes that social enterprises have a distinct and valuable role to play in helping create a strong, sustainable and socially inclusive economy.

Social enterprises are diverse. They include local community enterprises, social firms, mutual organisations such as co-

operatives, and large-scale organisations operating nationally or internationally. There is no single legal model for social
enterprise. They include companies limited by guarantee, industrial and provident societies, and companies limited by shares; some organisations are unincorporated and others are registered charities.” from the BERR (now BIS) publication ‘ Social Enterprise – a strategy for success’…”

They differ from charities in that they can make profits. For more information go to http://www.bis.gov.uk/cicregulator.

Over 8000 CICs have been registered. They come in all shapes and sizes. Many CISs have no members with voting rights other than the directors. Others may have a relatively large number of members with an interest in the governance of the company and some powers in the shape of voting rights. If there is share capital then it is one vote per share. Otherwise, if we are talking about a company limited by guarantee for example, it’s one member one vote. Since it is directors that have responsibility for the management of the company one important way in which members can exert their influence is in the choice of directors. In one model set of Articles of Association that I have seen it is suggested that members appoint directors by simple resolution.

Resolutions involve yes or no decisions, should person X be appointed or not, should persons X, Y, and Z be appointed or not. This is ok if there is a general understanding that such persons be appointed, or members are content to accept the
recommendations of the board, but what if this is not the case? What if there is unhappiness about the priorities or competence of the directors? Maybe it is a good idea to elect directors, as is done in Building Societies and ordinary Public Limited Companies for example.

In these situations the voting system commonly used is often known as the multiple X vote. In the case of building societies this system is prescribed by law. Say there are three vacancies to fill. There may be say six candidates competing for those three places. Members put up to three Xs, one against each of the three or fewer candidates they prefer. In practice directors will have nominated the three candidates they want. In the case of the largest remaining society for example, the board has never failed to gets all its candidates elected, although on many occasions members have nominated other candidates, and there are real questions as to whether the board is serving members’ interests. The multiple X vote is at least partly to blame. Members who want to one of their nomineees elected would either have to agree which of the board’s nominees should not be favoured or they have to vote ONLY for members’ nominees – something which the board tries to con members they may not do.

Similar things happen with plcs. The nominations committee of the board will put forward its slate of candidates and almost invariably it is these candidates that get elected.

In contrast to building societies, companies, whether CICs or not, do not have to use multiple X voting; their articles can
specify an alternative system, and some organisations use Single Transferable Vote (STV) and are very happy with it.
Under this system each member or (share) has one vote which however can move between candidates. The voter ranks candidates in order of preference. Votes are initially assigned to first preferences. If that candidate has no chance of election, or if he or she already has enough support to secure election then the vote will be reassigned to the next preference. You can find more about this system at http://www.electoral-reform.org.uk/voting-systems/. The language used is geared towards public elections, but around 200 organisations in civil society do use STV, see: http://stvaction.org.uk/STVorgs.

Obviously adopting STV is a big step; how do you decide whether it is suitable for you? If you are a large CIC you might consult an independent supplier of ballot and election services. Electoral Reform Services Ltd http://www.electoralreform.co.uk/ is one such that does have experience of STV amongst other systems. However if you want to explore the concept without spending a lot of money up front you could consider running a mock election, and for that purpose there is some useful software at, http://www.openstv.org/. Please contact me for further information.

This information is provided in good faith but I cannot be held responsible for the consequences of relying on it.

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